House prices predicted to slump

27 February 2004

Analysts are predicting sharp falls in house prices later this year, after a Nationwide survey revealed the price of the typical home leapt by 3.1 per cent during February.

Nationwide predicted that the continuing housing boom would not result in a crash, but city analysts are less convinced.

Ed Stansfield, of Capital Economics told The Times newspaper that outright falls in prices were likely to emerge in the second half of 2004 many economists predicted further increases in the base rate of interest over the next few months in a bid to curb the housing market.

"If going from a monthly rise of 3.1 per cent in February to outright falls in the next six to nine months seems a little far-fetched, remember that in the third quarter of 1988 - just nine months before the peak in house prices in May 1989 - Halifax reported average house price rises of 3.6 per cent a month," Mr Stansfield warned.

Nationwide said yesterday that February's rise was the strongest increase since April 2002, and only the second time in 11 years that prices had risen by more than 3 per cent on the month. However, Alex Bannister, Nationwide chief economist, said: "This acceleration probably reflects buoyant employment and a continued lack of property supply. The market is set to remain strong in the near term."

John Butler, at HSBC, predicted that the surge in house prices would lead to further interest rate hikes, adding: "If this marks a new re-acceleration, it raises the risk that interest rates rise earlier and by more than the market expects."

The Bank of England raised interest rates twice over the past three months, increasing the cost of borrowing from 3.5 to four per cent.

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